Correlation Between Home Depot and Bank of Montreal

Can any of the company-specific risk be diversified away by investing in both Home Depot and Bank of Montreal at the same time? Although using a correlation coefficient on its own may not help to predict future stock returns, this module helps to understand the diversifiable risk of combining Home Depot and Bank of Montreal into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between The Home Depot and Bank of Montreal, you can compare the effects of market volatilities on Home Depot and Bank of Montreal and check how they will diversify away market risk if combined in the same portfolio for a given time horizon. You can also utilize pair trading strategies of matching a long position in Home Depot with a short position of Bank of Montreal. Check out your portfolio center. Please also check ongoing floating volatility patterns of Home Depot and Bank of Montreal.

Diversification Opportunities for Home Depot and Bank of Montreal

0.71

Correlation Coefficient

Home Depot  Bank of Montreal

Poor diversification

The 3 months correlation between Home and Bank is 0.71. Overlapping area represents the amount of risk that can be diversified away by holding The Home Depot and Bank of Montreal in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Bank of Montreal and Home Depot is a relative statistical measure of the degree to which these equity instruments tend to move together. The correlation coefficient measures the extent to which returns on The Home Depot are associated (or correlated) with Bank of Montreal. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Bank of Montreal has no effect on the direction of Home Depot i.e., Home Depot and Bank of Montreal go up and down completely randomly.

Pair Corralation between Home Depot and Bank of Montreal

Assuming the 90 days trading horizon The Home Depot is expected to under-perform the Bank of Montreal. In addition to that, Home Depot is 1.37 times more volatile than Bank of Montreal. It trades about -0.37 of its total potential returns per unit of risk. Bank of Montreal is currently generating about -0.23 per unit of volatility. If you would invest  9,756  in Bank of Montreal on October 8, 2024 and sell it today you would lose (344.00) from holding Bank of Montreal or give up 3.53% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	100.0%
Values	Daily Returns

The Home Depot  vs.  Bank of Montreal

Home Depot

Risk-Adjusted Performance

0 of 100

Weak

Over the last 90 days The Home Depot has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of comparatively stable forward indicators, Home Depot is not utilizing all of its potentials. The current stock price uproar, may contribute to short-horizon losses for the private investors.

Bank of Montreal

Risk-Adjusted Performance

14 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Bank of Montreal are ranked lower than 14 (%) of all global equities and portfolios over the last 90 days. Despite nearly unsteady basic indicators, Bank of Montreal reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Home Depot and Bank of Montreal

The main advantage of trading using opposite Home Depot and Bank of Montreal positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Home Depot position performs unexpectedly, Bank of Montreal can make up some of the losses. Pair trading also minimizes risk from directional movements in the market. For example, if an entire industry or sector drops because of unexpected headlines, the short position in Bank of Montreal will offset losses from the drop in Bank of Montreal's long position.

The idea behind The Home Depot and Bank of Montreal pairs trading is to make the combined position market-neutral, meaning the overall market's direction will not affect its win or loss (or potential downside or upside). This can be achieved by designing a pairs trade with two highly correlated stocks or equities that operate in a similar space or sector, making it possible to obtain profits through simple and relatively low-risk investment.

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Note that this page's information should be used as a complementary analysis to find the right mix of equity instruments to add to your existing portfolios or create a brand new portfolio. You can also try the Fundamentals Comparison module to compare fundamentals across multiple equities to find investing opportunities.